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$TWTR – What You Don’t Know May Not Profit You

Takeaway: Caution is advised for Twitter bulls.

Editor's note: This is a brief excerpt from a recently released Hedgeye report.

The Known:

Hedgeye Internet analyst Hesham Shaaban says “2Q14 was a monster quarter” and notes the company raised guidance by $100M, “a considerable raise relative to prior implied 2H14 guidance of $700M.” A massive driver for the quarter was ad content around the World Cup.

 

$TWTR – What You Don’t Know May Not Profit You - 56

The Unknown:

How much of TWTR’s 2Q14 strength was driven by the World Cup – a month-long global event without a comparable event in the prior-year period, or its public history. Also unclear is how much TWTR is relying on its recent acquisitions – ones already closed, plus three more announced for 3Q14 – to pump its increased guidance. Shaaban says the Street is not likely to pay up for an increase in revenues that comes inorganically – from a mix of acquisitions and one-off events.

 

The Unknown Unknown:

For the first time, TWTR growth in ad engagements lagged user activity, meaning users are fading Twitter ads at an increasing rate. Since TWTR gets paid when users actually engage with ads, this implies the company will have to push more ad volume, as ad engagement declines. In fact, Shaaban says TWTR’s growth has been driven more by surging ad load, and less by high volumes of user engagement. If TWTR can't get its users to engage with its ads at historical rates, it will need to introduce a disproportionately larger number of ads to continue to deliver results. This risks pushing the less loyal users away, especially since TWTR is largely dependent on mobile (smaller screen) users.

 

$TWTR – What You Don’t Know May Not Profit You - t2

What We Expect:

Shaaban expects a marked 2H14 deceleration in organic advertising revenue growth, though we could still see 2H14 revenues rise from its latest acquisitions. Shaaban doesn’t believe this is what the Street is expecting, or is willing to pay for. If TWTR's 3Q14 results reflect these expectations, Shaaban says it would cast serious doubt on the story.

 


LEISURE LETTER (09/17/2014)

Tickers: BYD, WYNN, HOT, H, HLT, HST, CCL

EVENTS

  • Sept 17: PENN at Credit Suisse Small & Mid Cap Conference
  • Sept 17-18: Hedgeye Cruise Pricing Survey mid-Sept
  • Sept 18: CLSA Investor Forum - Bloombergy
  • Sept 18: PENN at Craig-Hallum Alpha Select Conference
  • Sept 18: Imperial Capital Global Opportunities Conference
    • BYD, PENN, GLPI
  • Sept 18: WYN & VAC at MKM Entertainment, Leisure Conference

COMPANY NEWS

BYD – announced that Chief Operating Officer Paul Chakmak will leave the Company, effective September 19. Keith Smith, President and Chief Executive Officer, will assume Chakmak's responsibilities.  Additionally, the Company reaffirmed its previous guidance for the full-year 2014, projecting total Adjusted EBITDA in the range of $580 million to $600 million

Takeaway:  A step in the right direction given the track record.  We've consistently said that BYD could add $5-7 in value per share by improving its operations. We would've preferred a qualified replacement rather than the CEO assuming the COO duties.  Reaffirmation of guidance an on the margin positive.

 

577:HK Louis XIII – Louis XIII Holdings Ltd. just made the biggest single order in the history of British luxury car maker Rolls-Royce Motor Cars, plopping down $20 million for a 30 car fleet of bespoke Rolls-Royce Phantoms. The fleet is to be delivered in 2016. The deal will give Louis XIII the largest fleet of Rolls’ Phantom model car in the world, and two of the cars featuring “external and internal gold-plated accents” will be the most expensive Phantoms the company has ever produced and sold. 

Takeaway:  Building out the infrastructure to support the super VIP, by invitation-only clients.

  

WYNN – Wynn Resorts topped Mohegan Sun for the Boston-area casino license. The Massachusetts Gaming Commission voted 3-to-1 to award the license to Wynn based largely on the strength of its $1.6 billion project’s economic development potential.

Takeaway:   Now WYNN has to please the Boston Mayor and wait for the resolution of the November Repeal referendum.   The Everett casino will take 36 months to construct and contain 504 hotel rooms, 3,242 slots and 168 gaming tables.

 

HOT/HLT/H –  Cabo San Lucas Hotel Update following Hurricane Odile

  • Starwood Hotels & Resorts said that the Sheraton Hacienda Del Mar and Westin Resort and Spa Los Cabos sustained enough damage to prevent the properties from accepting new guests until at least Oct. 31.
  • The Hilton Los Cabos Beach & Golf Resort said that all guests and employees were safe but that the property would be closed “until a definitive assessment of the damage is complete.”
  • Hyatt Place Los Cabos and Hyatt Ziva Los Cabos are closed and not accepting reservations for the next 30 days.
  • The One&Only Palmilla will be shut down until Sept. 25.

Takeaway: Risks to operating hotels in tropical latitudes. 

 

HST – The United States District Court for the Eastern District of Virginia has issued a preliminary order of forfeiture and a restitution order in regards to the guilty plea filed by Robert Koger. Koger pleaded guilty on Jan. 16, 2014 to wire fraud and conspiracy to commit wire fraud. According to the restitution order Koger is required to pay back a total of ~$40.7 million of which ~$20.3 million is to be paid to Host Hotels and Resorts.

Takeaway: A small one-time windfall and recovery. 

 

Seatrade Med Conference Takeaways (Seatrade Insider, Hostelur)

  • David Dingle (Carnival UK chairman):  "I'm starting to feel good for the first time about all the European markets as a whole.  In Spain, the economic situation has bottomed and there are signs of growth, while the strong passenger volumes in France are encouraging."
  • In 2013, a record 6.4m Europeans cruised, a 4% increase over 2012, and Europe's appeal as a destination drew 1m people from overseas to cruise in continental waters.
    • <3% of European population cruised
    • <1% of Asia population cruised
  • Kyriakos Anastassiadis, CEO of Louis Cruises:  "Greece has really come back strongly" with close to 2m total tourists. "For the next two to three years there will be continued demand for the Eastern Mediterranean, particularly Greece and Turkey."

  • "China effect" helping growth

  • Oasis of the Seas handled record 58k passengers last weekend

  • Of last year's 27m passenger movements, 19m were in the Western Med, 5m in the Adriatic and 3m in the Eastern Med.

  • Jorges Vilches (Pullmantur CEO):

    1. Spain showed signs of recovery on demand side  
    2. Western Med and the Med itself have tremendous growth potential, with Europe source market outsizing US's
    3. Additional ship in 2016 for Pullmantur
  • Eastern Med can be a growth opportunity

  • Urging ports to consider reduced off-peak tariffs

  • Risks:  lack of infrastructure in ports, civil unrest, and geopolitical tension

Takeaway:  Europe for the most part has been a bright spot in 2014.  Can the momentum be sustained in 2015 given the emerging macro headwinds?  

 

CCL (Travel Weekly) Carnival Cruise Lines is renewing its Great Vacation Guarantee for another year, after guests used it 47 times to get refunds since its debut in September 2013.  The guarantee provides for a 110% refund, complimentary transportation home and a $100 shipboard credit on a future cruise if guests are dissatisfied with their vacation for any reason. The guarantee must be invoked within the first 24 hours of the cruise. 

Takeaway:  If it worked before, do it again.

INDUSTRY NEWS

Chinese Advised to Avoid the Philippines (Macau Business) The Ministry of Foreign Affairs has warned Chinese against traveling to the Philippines.
The ministry issued a written statement saying this is because the Philippine police recently found that a criminal gang planned to attack the Chinese Embassy in Manila, Chinese interests in the Philippines and public places there, including shopping malls. It advised Chinese already in the Philippines to be extra cautious

Takeaway: A significant headwind for Chinese visitation and gaming spend.  A warning from the Ministry will not be taken lightly.

 

Forefront of Macau Gaming Leaders Investigated (SCMP) Four Macau casino workers are believed to be under police investigation after they took part in a string of protests for better pay and benefits. They were being accused of "aggravated disobedience".  Forefront of Macau Gaming co-founder and secretary general Cloee Chao, a casino supervisor, became a criminal suspect on September 10, though no charges were specified, a Public Security Police Force document. Chao said three other union members were under investigation, including: Union President Ieong Man-teng, Lei Kuok-keong and Ung Kim-ip. 

Takeaway: The operators and authorities strike back at Forefront of Macau Gaming.  Macau's Basic Law states residents have freedom to demonstrate, strike and organize trade unions. However, Macau does not have a collective bargaining law.

 

Clark County To Examine Slot Parlors (Restricted Gaming License) –  Under Nevada and Clark County laws, slot machines can only be an amenity at taverns, like a pool table or dart board, not the main attraction. The Clark County Commission passed regulations in 2011 that forced slot parlors to start acting more like bars - revised rules required at least 2,500 square feet of public space, seating for 25, a kitchen that’s open at least 12 hours a day and a bar with at least eight embedded slot machines with no more than 15 total slot machines. However, some slot parlor operators have not complied with the revised rules.  As a result, the Clark County Commission is returning to the issue of tavern gaming in an effort to stamp out slot parlors that have proliferated across the greater Las Vegas Valley.  Commissioner Steve Sisolak will introduce an ordinance on October 7, 2014 amending the county’s tavern gaming law to make sure bars that offer slot machines are also selling food and beverages to their customers. 

Takeaway: Could be indirect pressure from the larger local gaming operators (i.e., Boyd & Stations) to reduce competition. 

 

Trump SoHo Grand Foreclosure – Real-estate investor CIM Group, which holds a junior loan on Trump SoHo, the upscale Manhattan hotel and condominium tower is taking control of the building through a foreclosure process and has hired brokerage Eastdil Secured to auction off the property. Mr. Trump has a licensing arrangement with Trump SoHo and manages the property, but doesn't have an equity stake.

Takeaway: Developed near the peak of the prior real estate and economic cycle.  Condo sales have been hampered by the restrictions preventing full-time occupancy.  

MACRO

China Bank Lending (Bloomberg) The Chinese Central Bank will provide China's largest five banks - ICBC (601.398.CH), China Construction Bank (601939.CH), Ag Bank (601288.CH), Bank of China (601988.CH), and Bank of Communications (601328.CH) - with CNY500B in liquidity via standing lending facilities with three month tenors. The banks will each receive CNY100B, and the process is due to be completed Wednesday.

Takeaway:  After much promises, the central bank finally acted.  While not a 0.5% RRR cut, the effects may be similar.  Our research suggests a lag response of 9-11 months for VIP gaming.

 

Hedgeye remains negative on consumer spending and believes in more inflation.  Following  a great call on rising housing prices, the Hedgeye

Macro/Financials team is turning decidedly less positive. 

Takeaway:  We’ve found housing prices to be the single most significant factor in driving gaming revenues over the past 20 years in virtually all gaming markets across the US.


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Darius Dale

Associate: Macro Team


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TWTR: Has the Story Changed?

Takeaway: 2Q14 results would suggest as much, but there are still too many question marks to believe that this type of upside is sustainable.

 NOTE SUMMARY

  1. What We All Know: 2Q14 was a monster quarter, with accelerating revenue growth across both segments.  The guidance raise was equally impressive.  
  2. What No One Really Knows: How much of its 2Q14 strength was driven by the World Cup, and how much of its guidance raise was tied to its recent string of acquisitions in its Data Licensing segment.  
  3. What the Data Suggests: Users are starting to fade twitter ads at an increasing rate, which would suggest that TWTR's growth strategy of rampant increases in ad load isn't sustainable.  
  4. What We're Expecting: A marked acceleration in data licensing revenue growth in 3Q14, alongside a marked deceleration in 3Q14 advertising revenue; a setup that may take the street by surprise.  

 

WHAT WE ALL KNOW

2Q14 was a monster quarter.  TWTR beat revenue estimates by 37M (14% upside) with accelerating revenue growth across both segments, alongside accelerating US user growth (bots included).  The company raised guidance by $100M, even after backing out the 2Q14 upside, it's still a considerable raise relative to prior implied 2H14 guidance of $700M at the midpoint.  

 

WHAT NO ONE REALLY KNOWS

How much of its 2Q14 strength was driven by the World Cup, which is a month-long event without a comparable event in the prior-year period.  Management made multiple comments citing World Cup as a tailwind, but without any detail to quantify the impact.  What we do know is that Global Timeline views saw its sharpest q/q increase since 2Q13, and that doesn't include TWTR's tailored content around the event, where ads were naturally served.  

 

The other thing to consider is how much its recent acquisitions factored into its guidance raise.  TWTR spent $132M on 7 acquisitions in 2Q14, all within its Data Licensing segment, which saw its sharpest sequential increase in revenue growth since TWTR closed the MoPub acquisition.  The company has since announced 3 more acquisitions in 3Q14.  The question is how much of an impact will these acquisitions have on TWTR's revenues in 3Q14 after contributing a full quarter of revenue.  

 

TWTR: Has the Story Changed? - TWTR   Data 2Q14

 

WHAT THE DATA IS TELLING US

For the first time in TWTR's reported history, its sequential growth in ad engagements lagged that of user activity (global timeline views); meaning that users are starting to fade twitter ads at an increasing rate.  Remember that TWTR's reported timeline views do not include the tailored content around the World Cup, so the 2Q14 inflection is worse than the chart below suggests.  

 

TWTR: Has the Story Changed? - TWTR  Timeline vs. Ad Engagements

 

It's important to note that TWTR generally only gets paid when users engage with its ads, so it's a concern if users are fading them at a higher rate; especially since our analysis suggests that TWTR's growth over the LTM has been driven primarily by surging ad load more than anything else (see note below for detail).  

 

If TWTR can't get its users to engage with its ads at historical rates, then it means it needs to introduce a disproportionately larger number of ads to deliver the results the street is expecting.  That runs the risk of pushing the less loyal users away, especially since TWTR is largely dependent on mobile (smaller screen) to drive its ad revenues.

 

We recommend reading the note below for context.

 

TWTR: What the Street is Missing

05/19/14 09:09 AM EDT

http://app.hedgeye.com/feed_items/35420  

 

WHAT WE'RE EXPECTING

We continue to expect a marked 2H14 deceleration in advertising revenue growth; the impetus being the inability to comp past the 2Q13 ad supply shock that we discuss in the note above.  However, we could still see upside to 2H14 revenue estimates, albeit inorganically, from its recent string of acquisitions in its Data Licensing segment.

 

However, we don't believe that is what the street is expecting, or is willing to pay for.  The growing sentiment from many of the bulls that we're speaking with is that TWTR is becoming the next FB as the #2 option for growing social media ad budgets.  If TWTR's 3Q14 results reflect our expectations above, it would case serious doubt on the story, and we would expect the street to sour on the name.  

  

Let us know if you have any questions, or would like to discuss in more detail.

 

Hesham Shaaban, CFA

@HedgeyeInternet

 


Bounce in U.S. Equities

Client Talking Points

ASIA

With the Russell 2000 down -1.2% year-to-date, it’s been a lot easier for small/mid cap growth investors to stay with long China, India, and Indonesia – all up again overnight to +12.5%, +27.6%, and +23.5% year-to-date, respectively – that’s where the real perfect is and also why you’ll see a higher “International Equities” allocation in our asset allocation model than USA.

USD

One of the biggest overbought exhaustion signals in 15 years remains, but you saw what a downtick in USD can do yesterday; huge 1-day move in both Oil and Energy (XLE) stocks – we still think the Fed gets easier throughout Q3/Q4 as the rate of change in U.S. economic growth data slows – consensus is hawkish.

UTILITIES

The Down Dollar, Down Rates move yesterday paid the slow-growth #YieldChasers – that was the 1st SPX Sector we signaled buy on alongside the SPX oversold signal at 1977; XLU +1.2% on the day yesterday to +13.1% year-to-date  – we’ve stayed with that all year and we’re not changing our minds on it into the Fed statement either.

Asset Allocation

CASH 36% US EQUITIES 6%
INTL EQUITIES 19% COMMODITIES 4%
FIXED INCOME 31% INTL CURRENCIES 4%

Top Long Ideas

Company Ticker Sector Duration
EDV

The Vanguard Extended Duration Treasury (EDV) is an extended duration ETF (20-30yr). Now that we have our first set of late-cycle economic indicators slowing in rate of change terms (ADP numbers and the NFP number), it's time to really think through the upcoming moves of this bond market. We are doubling down on our biggest macro call of 2014 - that U.S. growth would slow and bond yields fall in kind.

TLT

Fixed income continues to be our favorite asset class, so it should come as no surprise to see us rotate into the Shares 20+ Year Treasury Bond Fund (TLT) on the long side. In conjunction with our #Q3Slowing macro theme, we think the slope of domestic economic growth is poised to roll over here in the third quarter. In the context of what may be flat-to-decelerating reported inflation, we think the performance divergence between Treasuries, stocks and commodities may actually be set to widen over the next two to three months. This view remains counter to consensus expectations, which is additive to our already-high conviction level in this position.  Fade consensus on bonds – especially as growth slows. As it’s done for multiple generations, the 10Y Treasury Yield continues to track the slope of domestic economic growth like a glove.

RH

Restoration Hardware remains our Retail Team’s highest-conviction long idea. We think that most parts of the thesis are at least acknowledged by the market (category growth, real estate expansion), but people are absolutely missing how all the pieces are coming together to drive such outsized earnings growth over an extremely long duration. The punchline of our real estate analysis is that a) RH stores could get far bigger than even the RH bulls seem to think, b) Aside from reconfiguring 66 existing markets, there’s another 19 markets we identified where the spending rate on home furnishings by people making over $100k in income suggests that RH should expand to these markets with Design Galleries, and c) the availability and economics on large properties for all these markets are far better than people think. The consensus is looking for long-term earnings growth of 28% -- we’re looking for 45%.  

Three for the Road

TWEET OF THE DAY

Only bad thing about $LULU print is that it buys current mgmt team time.

We added LULU as a top long after the Street capitulated in June

@HedgeyeRetail

QUOTE OF THE DAY

It's fine to celebrate success but it is more important to heed the lessons of failure.

-Bill Gates

STAT OF THE DAY

TREASURIES: UST 10YR down -4 basis points for the week and -46 basis points year-to-date ahead of the Fed today.


CHART OF THE DAY: Did You Nail This?

CHART OF THE DAY: Did You Nail This? - COD 09.17

 

On August 15th, the 10-year yield hit a 2.30% low.  Within a month, by September 15th, the 10-year yield had tacked on 30 basis points and reached basically a three month high.  This morning the 10-year yield is trading off the recent highs from a couple of days ago, albeit only marginally.  Even if you didn’t nail the move, or did so in hindsight, the fact remains having a view on rates, and thus the U.S. dollar, is critical in global macro positioning.


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